Too much in retirement accounts

[target2019]

By having my Spouse and I max out tax Deferred accounts we can lower are taxes from 22% to 12%. Is that worth putting that much in a tax deferred account special with not having a match? Is lowering to 12% bracket worth it? The fees in the accounts are not that bad.

This could be an area where your opinion changes as you age. One regret I have is that we did not always max out our Roth accounts, since inception. This link has similar advice to the posts above.

https://www.bogleheads.org/wiki/Prioritizing_investments

Once you lower to the 12% tax bracket, your tax-deferred contributions are not as valuable. If you think of postponing the tax on $100, it would be about $12 today. There is some chance that a married couple will end up in a higher bracket. If that happens, you will end up paying more tax. This isn't a certainty, as tax law will change in the future, though. I think it helps to think of going from lower bracket(s) to higher bracket(s) as your family becomes more successful. So, IMO, follow the priority in the link, and go about filling the different investing spaces in order to have more flexibility.

 

[ckelly78z]

I always encourage a 401K contribution that maxes the employer match as a minimum. Pick up the free dough first. Do whatever next.

This is exactly what I told my son the other day, and my new SIL last year when they got new jobs. I strongly urged them to get the company match as soon as it is available, then load up whatever you can afford into Roth accounts.

That yearly 3% raise can provide you with a nice 2% boost every year to your contributions...Keeping 1% out for your increasing expenses.

 

[Rianne]

It matters when you started saving in tax deferred accounts. We started tax deferred savings in 1990. This historical chart of tax rates since 1989 shows tax savings as the tax rates were higher historically. But I understand you're discussing today's strategy and no one knows future tax rates.

https://files.taxfoundation.org/legacy/docs/fed_individual_rate_history_nominal.pdf

 

[bloom2708]

You don't really control how you earn the money when working.

But, you do control how/when you take it out.

If I have to pay 25% tax now or defer and pay 25% tax 20, 30 years down the road on my schedule, I'll choose to defer what I can.

Use your pre-tax space, Roth IRA space, Mega Back Door space, HSA space and finally Taxable space when you run out of previous places to save. Use them all if you can. Quit when you have no more to save.

 

[harley]

You don't really control how you earn the money when working.

But, you do control how/when you take it out.

If I have to pay 25% tax now or defer and pay 25% tax 20, 30 years down the road on my schedule, I'll choose to defer what I can.

Use your pre-tax space, Roth IRA space, Mega Back Door space, HSA space and finally Taxable space when you run out of previous places to save. Use them all if you can. Quit when you have no more to save.

I disagree. Obviously yes, get the match if available. And if deferring is likely to lower your tax burden now and later, do that. But IMO if I'm not gaining anything by deferring (same or higher taxes paid later) I'd rather invest the money in Roth and after tax vehicles. The Roth seems like a no brainer to me, and the after tax investments give you control. Yes, they'll probably throw off more taxable income over the years, but no that much and it's somewhat controllable. My DD has a 401K plan with no match and relatively expensive investments, so I don't see what putting money into that would buy her. She still puts a few percent in, but she saves the rest and invests it in low cost index funds. I would bet she'll come out ahead in the long run.

Also, when you put the money in deferred investments you don't really control how/when you take it out. You have to wait until 59.5 (with some exceptions), and then when you hit RMD age you get the avalanche, whether you want it or not.

 

[bloom2708]

I disagree. Obviously yes, get the match if available. And if deferring is likely to lower your tax burden now and later, do that. But IMO if I'm not gaining anything by deferring (same or higher taxes paid later) I'd rather invest the money in Roth and after tax vehicles. The Roth seems like a no brainer to me, and the after tax investments give you control. Yes, they'll probably throw off more taxable income over the years, but no that much and it's somewhat controllable. My DD has a 401K plan with no match and relatively expensive investments, so I don't see what putting money into that would buy her. She still puts a few percent in, but she saves the rest and invests it in low cost index funds. I would bet she'll come out ahead in the long run.

Also, when you put the money in deferred investments you don't really control how/when you take it out. You have to wait until 59.5 (with some exceptions), and then when you hit RMD age you get the avalanche, whether you want it or not.

That is what Roth Conversions are for. You control when to take it out and how much tax to pay. The RMDs are well known in advance so they should not be a surprise.

I see people scrimping and saving on the fee side but are happy to pay tax at the Fed/State rate when they could be deferring and saving the tax in Roth.

Saving more early means you have a better chance of getting to a big pile where tax management strategies are useful. Your wife could pick one fund, defer the fed/state tax and put the tax savings in Roth or Mega Back Door or taxable. Even a close to 1% expense ratio S&P 500 index in a high cost 401k has its place.

There are nuances, but if someone said you could save 12% or 22% more every year starting out, that would give the 20, 30, 40 year investing horizon more time to do its thing.

If you are in a pension career or large inheritance scenario, there might be reasons to start a mostly Roth strategy very early.

 

[scrabbler1]

I often debated with myself as to how much to put into tax-deferred (401k) versus taxable. Back in my peak earnings years, the 1990s, I made sure to contribute as much as I could to get the (75%) company match, of course. The tax rates were much higher back then, with 15% and 28% the 2 lowest tax brackets which went down in 2001 and again in 2018. State income taxes also dropped a little over the same time.


For a few years in the mid-1990s, I contributed some after-tax dollars to the 401k. When I began working part-time (and earned less), I wanted to keep the total 401k contribution as a % of income the same, so I increased my contribution to offset the decrease in the company match.


But when I reduced my weekly hours worked (and income) for the second time in 2007, which is when I was greatly increasing my ER plan, I got rid of any 401k contributions. I had made myself ineligible for any company match, so that "free money" opportunity disappeared.


The big switch from tax-deferred to taxable came when I left the company. I knew beforehand that I needed to reverse the 2:1 ratio of tax-deferred:taxable to 1:2. To make that happen, I cashed out the company stock which comprised about half of my tax-deferred (1/3 of my total portfolio) and moved it to taxable. I used NUA to lessen the tax bite while doing a direct rollover of all remaining tax-deferred money. I was able to cash out the small amount of after-tax contributions I made in the 1990s without any tax liability or penalty.


This worked out well, as I was able to reverse the tax-deferred:taxable ratio as planned without getting to creamed in taxes, and began my ER which is still going strong at 11 years.


Part of my ER plan was to split my plan into 2 parts. The first part was to get from age 45 (when I ERed) to age ~59.5. That age, which is only 3 years from now, is when the first of my "reinforcements" begin arriving. They are unfettered access to my tIRA, my frozen company pension, and SS. Longer-term outlooks for my retirement only get better starting at age 59.5, according to Fidelity's RIP program.

 

[EvrClrx311]

I've wondered about this question as well...

In my mid 20's I was lucky to sign on with a tech company that had a benefit where they put 20% of my base salary (on top of the base, that is) into my 401k for me regardless of what I contribute. The first 5 years I worked here I didn't contribute at all, until I realized that was foolish... so I started maxing my own contributions in my late 20s

In my 30's my base pay had risen to the point where the company contribution maxed out (currently at $37,500 I believe), and I'm still contributing the max ($19,500) which means $57,000 annually is being added to my 401k... I hit a few road blocks along the way (divorce at 31, which split the account) but with that much going in, it's recovered quickly. FWIW I do not get a tax deduction for the part my company contributes, just for the $19,500 that I'm putting in.

Excel shows that on my current plans, if I work until 50, and find a bridge between then and 59... my 401k will be large enough that I'll be pulling $400-500K a year, likely hitting a higher tax rate than the write off of what I'm saving now... that said, inflation will eat away at that. I mean, in 20 years 400K won't be nearly as much as it is today, but I'm sure it'll be more than enough. I guess it's anyone's guess what the tax brackets will do though?

So I thought I should stop contributing the $19,500 annually and instead put that aside in taxable accounts, however it might be a better idea to just keep piling it in there, and do the rule 72(t) and start drawing on the account at 50, instead of letting it compound to the point where I'm past the penalty phase.

Good problem to have, but to date, I haven't really considered much the tax consequences of the situation... I just was trying to grow the nest egg. Right now I don't have much in taxable accounts, and I do have some equity in real estate (three homes, in an easily rent-able area)... but the home rental investment thing is really keeping my tax levels low right now (with deductions), meaning I'm not benefiting as much from the $19,500 401k contribution as most would at my income level.

Maybe it's all a wash, one way or the other... saving to taxable on the side vs. maxing the 401k... or maybe I'm missing something obvious here?

 

[bloom2708]

EvlClrx311,

Could you switch to Roth 401k for the first $19,500? Match is always pre-tax.

Does your company to Post-Tax contributions? Do they have a Roth conversion option? (Mega Back Door Roth).

$400k/year withdrawal? At 3.5% I estimate you think your 401k will have ~$11 million in it?

Maybe I'm not reading that correctly.

 

[EvrClrx311]

EvlClrx311,

Could you switch to Roth 401k for the first $19,500? Match is always pre-tax.

Does your company to Post-Tax contributions? Do they have a Roth conversion option? (Mega Back Door Roth).

$400k/year withdrawal? At 3.5% I estimate you think your 401k will have ~$11 million in it?

Maybe I'm not reading that correctly.

There is no Roth 401k or post tax option available :\...

but my wife has an IRA with about $210,000 in it that we might be able to back door into a Roth IRA? I guess with a lot of deductions on the homes right now, might be an ideal time to pay the taxes?

Yep, that's about right, your math, though I was assuming 4%. Well assuming the market does over the next 23 years, on average, what it's done for the last 50 years, on average. We might fall a little below that mark as we move away from equities (index funds) and into bonds. I'd estimate between 7-11M at 60 in the retirement accounts, none of it pre-taxed, at least on our current path.

Is there a better taxable place to put that $19,500 annually? I'm also unaware of what the rules are about contributing to my wife's IRA (she just switched to a part time job... doesn't have a 401k or match option). Might it be better to direct that $19.5K to her IRA? and backdoor it into a Roth IRA?

 

[rollergrrl]

Personally, I have only ever made 401k contributions to avoid taxes at 24% or higher.

It does seems historically that tax brackets have been lowering overtime. Would you consider this in your planning for someone 15 years away from Fire.

 

[Gumby]

It does seems historically that tax brackets have been lowering overtime. Would you consider this in your planning for someone 15 years away from Fire.

In my view, taxes have already been lowered too much and the budget deficit is soaring as a consequence. I see only tax increases in store for us, not decreases. I will be happy to be proven wrong, but I don't think I will be.

 

[RobbieB]

That's why I've been spending down the IRA well before RMD time!

 

[BoodaGazelle]

Here is my advice. 1) max out whatever you can put into a Roth... when DW and I were in our peak earning years, we were told we could not “do” a Roth; then when the rules were changed, I missed putting in as much as we could have.
2) do not end up with most of your money in tax-deferred accounts, and little in post-tax accounts. You will find many discussions here about the wisdom of having post-tax money to live on and not being forced to withdraw from your IRAs. This mostly has to do (today) with ACA subsidies, and of course this could change in the future.

Good luck!

 

[ncbill]

If you know by maxing out your 401k that you have a great chance of being in a higher tax bracket at retirement and you are maxing out Roth too. Are you better off slowing down the 401k and focus on a Brokerage account?

Don't forget for many there are Roth options in their employer's plan.

My recent graduate saves 30% in their Roth TSP and gets a 5% match in the traditional tax-deferred TSP.

Why Roth?

Because he knows he is in a lower tax bracket now than he will be in the future...plus being in the military he receives non-taxable housing/subsistence allowances as well.

 

[Montecfo]

This is exactly what I told my son the other day, and my new SIL last year when they got new jobs. I strongly urged them to get the company match as soon as it is available, then load up whatever you can afford into Roth accounts.

That yearly 3% raise can provide you with a nice 2% boost every year to your contributions...Keeping 1% out for your increasing expenses.

So what is the basis for your advice regarding Roths? To me Roth versus tax-deferred is dependent primarily on tax rate expectations. MOST folks can expect to be in lower tax brackets upon retirement as income will be lower for most folks. The "tax torpedo" angst is mainly an issue for folks with generous pensions and prodigious savers (there are a lot of BOTH here, but we are outliers).

In my opinion, you want some tax diversity. I personally invested primarily in 401K/IRA, secondarily in Roth (early in career at lower tax rates) and thirdly in taxable (later in earning career so it is not juicing taxes the whole way).

 

[CRLLS]

It is not just federal tax brackets to consider but state tax brackets also. I would have to answer the question of, in the next 15 years or beyond, Am I going to be in the same state I am today? For instance, currently in Illinois there is no income tax on SS, pensions IRA, 401K or other retirement disbursements. Not many other states can claim that. The downside is that tax brackets change, both state and federal. Trying to look forward 5 or more years is like trying to hit a moving target.

I have mentioned in other threads, there are other benefits from having everything in a Roth. One being the possibility of freezing one's property tax assessments, and the possibility of a Senior Tax deferral. If one has only a Roth as their retirement savings, then there is no other outside income to be counted as income.

Currently we are retired and collecting some SS, so our plan would be different than yours. Unless we do something, in a few years we will be firmly in the federal 22% bracket (if that is what the brackets will be at that time). We are trying to reduce the tIRAs now, before RMD's, by using the tIRAs for some living expenses and converting well into the 22% bracket avoiding other triggers for the various cliffs. Our plan also helps to mitigate the inevitable surviving spouse's taxes when filing single.

My point is there is more to consider than comparing your anticipated Fed tax brackets now vs later. A lot depends on how detailed you want to plan (guess).

 

[teetee]

In my mind we should always maxmize the contributions to all the applicable retirement accounts to take advantage of tax related benefits.

I also like ROTH better because there is no RMD with ROTH which is the biggest income tax source during the retirement (assuming that all your income comes from retirement accounts).

So my strategy is convert my 401 k / tIRA to Roth IRA during the low income years before retirement so I can avoid taking the RMD after 72.

 

[TheWizard]

I was in the 28% marginal Federal tax bracket for the last decade before I retired and I maxed out my tax-deferred 403(b) contributions for at least the last five years before retiring, along with the $5500 or $6000 max to my Roth IRA.

I retired a while back and now with the tax law change, I'm in the 24% marginal Federal tax bracket. But I worked a few years too long and, as a result, both my AGI and the dollar amount of taxes paid to the IRS each year in retirement are higher than they were during working years.

Now some of that AGI is due to Roth conversions I've been doing prior to age 70.5, and now to age 72.
But my projections don't show AGI decreasing after age 72, since I've been Levelizing my AGI for a while now.

I'm ok with this situation, not whining whatsoever...

 

[ckelly78z]

So what is the basis for your advice regarding Roths? To me Roth versus tax-deferred is dependent primarily on tax rate expectations. MOST folks can expect to be in lower tax brackets upon retirement as income will be lower for most folks. The "tax torpedo" angst is mainly an issue for folks with generous pensions and prodigious savers (there are a lot of BOTH here, but we are outliers).

In my opinion, you want some tax diversity. I personally invested primarily in 401K/IRA, secondarily in Roth (early in career at lower tax rates) and thirdly in taxable (later in earning career so it is not juicing taxes the whole way).

At this early stage of employment, I stressed maxing out the 401K company match (which will probably yield him 6% + 3% match) in tax deferred accts, and then whatever he can afford (probably another 6% at this young age) in Roth accts. He also has a Charle Schwab brokerage acct for playing around with others. This will give him a balanced investment portfolio for the future.

 

[armor99]

If it is a government 457, it is quite unlikely that there is an employer match, so I wouldn't bother at the very low tax brackets I posited. I would just max the Roth and save the rest after tax. However, if our hypothetical young person is successful, they will soon move up to the 24% bracket. At that point I would contribute to the 457 as necessary to stay in the 22% bracket, but not more.

I also don't believe there is any difference between the 457 and the 401k categorically that would preclude the Rule of 55 withdrawal. It is up to the individual plan. Actually, I think early retirement is best served by having a wad of after tax money on hand when you retire.

There is one wrinkle.... the rule of 55 applies to Roth 401k as well, but you will pay a prorated amount of tax on the growth, but no penalties... However, if at 55 you move it into a Roth IRA, and that ROTH IRA has existed for 5 years, then you CAN take out all of your personal contributions with no taxes, or penalties. I plan on doing this....

 

[Montecfo]

At this early stage of employment, I stressed maxing out the 401K company match (which will probably yield him 6% + 3% match) in tax deferred accts, and then whatever he can afford (probably another 6% at this young age) in Roth accts. He also has a Charle Schwab brokerage acct for playing around with others. This will give him a balanced investment portfolio for the future.

To me that strategy would vary depending on tax brackets. If he is in the 12 percent bracket then sure go Roth after picking up match. 22 or 24 percent, then it is less clear. I would probably tilt back toward tax deferred at those rates, or possibly split between deferred and Roth

These singles hit those higher rates so quickly.

 

[pb4uski]

I was in the 28% marginal Federal tax bracket for the last decade before I retired and I maxed out my tax-deferred 403(b) contributions for at least the last five years before retiring, along with the $5500 or $6000 max to my Roth IRA.

I retired a while back and now with the tax law change, I'm in the 24% marginal Federal tax bracket. But I worked a few years too long and, as a result, both my AGI and the dollar amount of taxes paid to the IRS each year in retirement are higher than they were during working years.

Now some of that AGI is due to Roth conversions I've been doing prior to age 70.5, and now to age 72.
But my projections don't show AGI decreasing after age 72, since I've been Levelizing my AGI for a while now.

I'm ok with this situation, not whining whatsoever...

So at the end of the day if you deferred at 28% and withdrew at 24% the you saved at least 4%.... right? Perhaps not the extent of savings that you expected when you deferred the income, but nonetheless still a savings.

 

[pb4uski]

To me that strategy would vary depending on tax brackets. If he is in the 12 percent bracket then sure go Roth after picking up match. 22 or 24 percent, then it is less clear. I would probably tilt back toward tax deferred at those rates, or possibly split between deferred and Roth

These singles hit those higher rates so quickly.

+1 12% is a pretty low bar... if one is currently in the 12% tax bracket then Roth is the way to go as it is unlikely that one will be in a lower tax bracket when withdrawing.... 22 or 24% then income deferral migh be perferable but you need to pick up a pencil and do some ciphering.

 

[fosterscik]

I think it's worth mentioning that when I put money into a traditional IRA it saved money at my marginal tax rate (both Federal & State). Now that I'm withdrawing I get the additional benefit that some of those draws are covered by standard deductions and lower brackets and it's my effective tax rate that counts. Every little bit counts!